Ladies and gentlemen, thank you for standing by. I am Hayley, your Chorus Call operator. Welcome and thank you for joining the Hapag-Lloyd Analyst and Investors Conference Call on the first half-year results 2019. Hapag-Lloyd is represented by Rolf Habben Jansen, CEO, Nicolás Burr, CFO, Heiko Hoffmann, Head of Investor Relations, as well as Anna Neumann from the Investor Relations team. Throughout today's recorded presentation, all participants will be in a listen-only mode.
The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by One on your touchtone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Rolf Habben Jansen, CEO. Please go ahead.
Thank you very much, and thanks everybody for taking the time to join us on this call. We have prepared as usual a short presentation, which Nicolás and I will take you through. Then, of course, we'll be happy to take any questions you may have after that. Maybe a couple of first opening remarks. I think when we look back on the first half year, I would say it's been a pretty good half year where we have been able to significantly improve the results.
We have also made some tangible further steps to implement our Strategy 2023, yeah. Freight rates have been up around 5% and volume has been up about 2%, and we've been able to keep costs more or less stable.
If you look at the market, I would say that there's clearly some clouds on the horizon, yeah. Maybe a few more than what we saw some months back. On the other hand, when we look at the data that are coming out, then the basic trend of volumes continuing to grow is still intact. Order book is at a record low level, yeah, with very few orders being placed in the first half of this year. Of course, everybody is preparing for IMO 2020. If we look at the numbers as such, clearly better group profits with EUR 165 million versus a loss last year. A good free cash flow, yeah.
I think also worthwhile mentioning that we did achieve the leverage target that we have set ourselves, which is net debt over EBITDA of 3.5. Then looking ahead, we will continue to focus on our strategy, and of course, we'll do whatever we can to further improve our results and prepare also towards IMO 2020. Looking a little bit more into what is the substance of the things that we've done in the first half year, apart from the numbers, we've continued to work on cost management.
As you know, we announced that we are going to work on a program to take out another EUR 350 million-EUR 400 million until 2021. That program is on track.
We have a couple of new services that are going to help us to boost our presence in some of what we would call the attractive markets, looking at Southeast Asia and also some parts of Africa. To boost our presence in the reefer segment, we've announced another investment in those boxes, which is, I think, the biggest we've done so far. To underline our commitment to reduce our debt, we have paid back one of our bonds early, the last part of it in June.
When you look at the cost management program, we already identified and presented to you the various boxes that we have there. Some in the network, some around container steering, also around collaboration with our partners and terminal partnering, and of course, also on procurement.
If you look at where we are, we have implemented what we had planned in 2019. For the first six months, we are roughly on track or maybe slightly ahead of what we had planned, and we do plan to see some more going into 2020 and also into 2021. When we look at the financial numbers, Nicolás will say quite a bit more about that in a minute. When we look at transport volume, that's up around 2%.
If you look a little bit deeper into that, we see actually that in intra-Asia, our volumes have been down. In the rest of the long-haul trades, we are up around 3.5% or a little bit more than that. Transport expenses, roughly flat.
Certainly if you correct it for bunker freight rate up around 5%. EBIT EUR 440 million compared to slightly over EUR 100 last year. Very clear improvement. Same goes for the group profit, and also EBITDA is up significantly. Although, of course, especially there, we have a bit of an impact of IFRS 16. Nicolás will share the numbers with you a bit later.
Equity stable, liquidity reserve solid, net debt down. Although, net debt down, if you look at it on like-for-like basis compared to six months ago, of course, if you take IFRS 16 into account, it's up somewhat. If you look at the market, I would say there is definitely growth is slower this year than it was last year.
We also see that in all of the forecasts that are being published, that they tend to be taken down a little bit. Having said that, we don't see any signals that the market is really falling apart. I saw this morning that Alphaliner issued also a more or less unchanged outlook from their end for 2019. I would also say that the trend is still intact and, you know, what we will see in the second half year compared to last year remains to be seen. Right now, we see a market that is actually reasonably stable. In that context, of course, the order book also remains important.
Today, we have an order book of only 10%, which is one of the lowest we have seen, both in absolute terms, but also in relative terms for a very long time. A very few new orders being placed and idle fleet being also at a very low level of somewhat around 2%, which on a historical basis, very low, certainly if you take into account that some ships are being taken out at this point in time to install scrubbers and the like. When we look at the other side of it, vessel deliveries, certainly some still scheduled this year and also next year.
If we look at net capacity growth, we estimated this year to be around about 3%, so more or less in line with what we see on demand growth. That's pretty much similar what we also expect in the years to come. Of course, scrapping today is still at a very low level at below 2%, which is definitely a level which midterm is not sustainable, and therefore, I believe that the graph that you see on page eight on the right-hand bottom, that the market will remain stable or market environment may even still improve a little bit in the years to come.
That's still I think that outlook still remains valid, even if the outlook for global growth is somewhat subdued.
Those things always need to be somehow seen in parallel, and as long as the order book remains small, yeah, that gives us some protection to the downside. That then brings us to our numbers, and for that, I will hand it over to Nicolás, who will take us through. Nicolás.
Thank you. Thank you, Rolf, and good morning, everybody. As Rolf commented, volumes up 2%. Freight rates, nominal freight rates going up 5% compared to last year. That's the reason why you see our revenue going up or increasing $470 million, which is basically 7% up. Bunker is also up compared to last year at a level of 11% higher. The ex-bunker rate is still higher due to the fact that the nominal rate also increased significantly.
If in a nutshell, when you look at the EBIT of the company, which is basically slightly affected positively by IFRS 16, by an amount of $15 million, we have an important improvement of $330 million compared to last year when you look at the first half. This is explained mainly by a better ex-bunker rate and better higher volumes. Basically two-thirds and one-third is an explanation, respectively.
When you look at the return on invested capital, also significant and material improvement compared to last year, 5.9% or around 6% compared to only 1.3% last year, and approaching rapidly to the WACC or the return on our cost of capital, which is something that we owe since a while.
When you look at the results of the company compared to what is the impact of IFRS 16, you see an improvement, an important improvement in EBITDA of $563 million, as you see there. Out of that, $245 million is due to the first implementation of IFRS 16. The real improvement is around $318 million, still over 60% improvement compared to last year. When you see a bit difference, as I just commented, 330, when you look at the difference or the positive impact of IFRS 16, you see $15 million improvement. The real difference, apples-to-apples, is $315 million. Still very good.
On the group profits, you see a difference of $287 million, but we have, in this case, a negative effect from IFRS 16. In the case we would have implemented that standard, the result would have been $21 million higher. Along with that, we have some one-off related to payments of the bonds that we, I will explain at the end, or perhaps we can leave it for the questions. We have an impact on the interest result that is also affecting the result of the first half of the year. When you look at the next slide in the volumes, you see the 2% increase clearly stated there, driven basically by Atlantic, Far East, and MAO.
I think this is interesting to say here that when you isolate the decline in intra-Asia, then you see a very nice growth even compared to the one that we had last year or the one that we see in the market. We have a drop basically in the intra-Asia trade, which is not the focus of the company, but also we experience a drop in the volumes in the Middle East trades. When you look at the rates in the next slide, you see a 5% increase in the nominal rate, 11% increase in the bunker. So the ex-bunker rate going up around 4% when you do the math.
Still, a slight improvement, but you see the leverage of the results of the company when the rates are going slightly up, when from one year to the other. Going to the unit cost, I think we said, Rolf commented in the beginning that we had a stable cost, unit cost, even though the bunker went up. Basically the difference between last year H1 $1,013 and $1,021 of this year is explained basically by bunker in a nutshell.
As I explained in the first quarter results, we now compare with depreciation in order to basically compare in the same basis after the implementation of IFRS 16. When you go to the details, it was $ per TEU higher on the bunker side.
Handling and haulage improved by $18 per TEU, mainly due to FX effects, but also because we run less inlands due to the fact that we are trying to basically focus on the most profitable movements. Then the idea is to continue improving that percentage in the context of our Strategy 2023, as you know. Equipment and repositioning is affected by IFRS 16, and therefore you have to consider the depreciation fraction of the cost related to this item is around $18 per TEU. Then we have to explain basically, compared to last year, a decrease in cost of around $6 per TEU.
This is basically because of more imbalances that we have had in the United States and or North America in general, and in Europe. Vessel and voyage, when you correct by IFRS 16, so you basically pick the fraction of the depreciation that corresponds to this item. The cost increased by $13 per TEU. But you don't have to consider the whole amount because we have also an increase in the slot charter revenue by $9 per TEU .
The real increase is around $4 per TEU, and this is explained mainly because of a higher time charter rate in 2019 compared to 2018. The increase in the depreciation, of course, is caused by the new standard.
This is the last year in which we compare two different standards and that generates a little bit of a complication. I think hopefully I was able to explain to you or clarify. When we go to cash flows, we see here an operating cash flow of around $1 billion. Very good, when you look at the cash conversion of 92%. We are satisfied with that development.
A little bit of investment in working capital and some other reclassifications, but that's pretty much normal in an environment in which the rates and the volumes are going up. The investment cash flows are minus $133 million, which is composed of fixed assets, $187 million.
146 out of that is containers, and the remaining part is basically vessels and others, maintenance CapEx. This is compensated by dividends and disposals of assets. When you look at the financing cash flow, this is a little bit more active in terms of the movements, $1.1 billion negative due to repayments of debt. $1.5 billion of repayments, compensated by intakes of around $700 million.
We are actively trying to optimize the financing structure, the financial base, financial liabilities, and try to optimize the interest burden. That's the reason why we have, and on top of that, of course, remaining debt in the context of our objective of de-leveraging the company.
In the next slide, you see a little bit more of our balance sheet. Fixed assets going up to EUR 15.5, and the explanation is basically a right-of-use in the implementation of IFRS 16. The equity base is basically up because of the profit, but it's compensated by the OCI effects and pension liabilities and the hedge accounting is compensating negatively the profits, plus the dividends that we paid during the year, of course.
The financial debt reflecting the announced de-leveraging effort, which is also explained in the next slide, when you see the evolution of our net debt to EBITDA. We are very pleased to announce that we have accomplished our objective of 3.15x, considering the last twelve months.
We are basically on the target, and we expect to continue trying to improve this as we improve our profitability, and we accomplish our objectives of Strategy 2023. With that, I hand it over to Rolf, who will start with the outlook.
Thanks, Nicolás. I think when you look at our outlook, I mean, the outlook is essentially unchanged. When we look at our transportation volume, we do expect that to increase slightly. When we're looking at the full year, we expect the freight rate to also end up somewhat above last year. Same goes for the bunker price. When we look at the ranges that we indicated for EBITDA and EBIT, our guidance also remains unchanged. When looking at the impact that we see from IFRS 16, we still think that remains valid as well. Maybe a few more words before we open it up for questions.
I think one of the things that you will have read is that going forward HMM will join THE Alliance as a full member as from April 1, 2020. That will certainly help to strengthen THE Alliance competitiveness, especially on the Far East and the TP, which are the main trades where they will be joining. I think also worthwhile mentioning here that that cooperation, the intention is to sign a new agreement that will last for 10 years, which underlines also the commitment that there is from the various partners.
Of course, with the order book that HMM has, that will also allow THE Alliance to become even more competitive on those trades.
That's where we also try to illustrate to you here, okay, what is actually the market share that THE Alliance has on the various trades. Where you see that on the Atlantic, we're roughly 1/3, and on the Transpacific, a little bit less than that, and 1/4 on the Far East, which shows that the balance between the three alliances is actually quite good. Which then leads us to my last slide, which is around the targets that we have set ourselves for 2019 and beyond. Not much change there compared to what we have communicated earlier. Our focus remains to continue to increase profitability.
Yeah.
To further deleverage the company. We do want to earn back our weighted average cost of capital. We still have a gap of about two percentage points there, so still some work to go. We have IMO 2020 coming towards us rapidly. Good progress in the first half year in getting the bunker formulas accepted by our customers. As everybody, I think, recognizes that changing the type of fuels we use is the right thing to do, even if that may come with some additional cost. Apart from that, we will continue to implement our Strategy 2023.
Yeah.
In that context, we'll also continue to work on developing more and better digitized, digitalized solutions for our customers. I think that sums it up from our end. Hopefully, that gave you a good overview of the first half and a little bit more detail on some of the points that you may want to get some more clarity on. With that, I will hand it back over to the operator.
Yeah.
to then take your questions.
Thank you. Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from the line of Robert Joynson of Exane BNP Paribas. Please go ahead.
Good morning, everybody. A few questions from me. First of all, just in terms of orders for new vessels. There's been some stories in the trade press recently suggesting that Hapag is considering ordering six 23,000 TEU vessels, which I guess would make sense given that there's only currently six vessels of that type of size in the alliance. Could maybe just kind of talk about those reports in terms of whether they're accurate or otherwise. Then on the leverage, the net debt to EBITDA target of 3.5 times has now been achieved. How should we think about gearing looking forward?
For example, would you allow the net debt to EBITDA to rise above 3.5x again going forward, or is the plan now to keep it below that level? Thank you.
Okay. Thanks. I mean, we have read those reports as well, and I think it's also fair to say that, you know, it is not, of course, Hapag-Lloyd will never order any vessels anymore, yeah. I mean, there is no plan right now to order any vessels shortly. You should certainly not expect any orders from us in 2019. As far as net debt to EBITDA, I think we've always said we first want to achieve this 3.5. I think we're happy that we achieved that. Previously we've also said that the mid-term, we believe that that's something between 2.5 and 3 would be a good level, yeah.
That's probably not cast in stone, but I think that's still the direction that you should assume.
I mean, if I think about that then, I mean, you know, obviously there's no plans to order vessels this year, but maybe that could happen next year. I mean, to kind of keep the net debt to EBITDA going forward, could an equity issue be a possibility, if you do order new ships maybe next year?
That's definitely not likely. No. That's not planned.
Just a follow-up question from that then. I mean, in terms of the free float, it's down to less than 8% now. I think you mentioned a year or so ago that you were looking at plans to raise the free float. Could you maybe just comment on that?
I mean, you know, to be honest, that is largely outside of our own control. We of course would like the free float to be a little bit higher, yeah, than where it is today. That remains our objective. To be honest, we don't control that, yeah. As such, there's not much more to say to that.
Okay. Thank you.
The next question comes from the line of Frans Hoyer of Handelsbanken. Please go ahead.
Oh, good morning, I guess. Thank you. I have two questions. One regarding the empty repositioning costs that you show in your slide 13. I think it was a headwind of $12 million year on year in the first half, after being a headwind in the first quarter of $15 million. That suggests to me that this headwind has died down in the second quarter. Would that be right?
I think I mean the way to look at it is basically considering the cost related to that empty repositioning item that is in the depreciation. That's important to consider. I think the extra cost that we have had in the first half is pretty similar in Q1 and Q2.
Okay. Thank you.
There is no difference. We expect to improve and to get a little bit more balance, this situation in the second half of the year, and we are working actively to achieve that. Mm-hmm.
Got it.
there is no difference or material difference between Q1 and Q2 on that.
Understood. Secondly, you talk about scrapping, and the low levels of scrapping are unsustainable. I'm thinking about, I mean, normally scrapping is not such fantastic.
No news because it is dependent on rates being poor. That is what normally persuades owners to scrap their vessels. In the context of IMO 2020, are you seeing IMO 2020 and the sharply higher fuel costs affecting perhaps more of the older vessels? How do you see that play out?
Yeah, I mean, I think, you know, first of all, when you look at scrapping, you know, the normal percentage of scrapping, if you assume that people use ships for, on average for about 25 years, then the normal average long-term percentage you should see should be around about 4%, yeah.
Mm. Yeah.
As such, that's why I'm also saying if we're sub 2, then that's very, very low. As far as, you know, IMO 2020 is concerned, I think you are right, is that the older vessels that are getting to 20-plus years, on the one hand, they will face significantly higher operating costs as they tend to be rather fuel inefficient anyway.
Mm.
It would not be illogical to see more of those ships being sent to the scrapyards, yeah.
Mm.
Over the upcoming couple of years. Whether all of that will happen in 2020 or whether that will come in 2021 or 2022, I mean, that remains to be seen. It's quite clear to us that that percentage is gonna come up, yeah. You know, that's also why I believe that the balance between order book and demand is actually right now fairly healthy because certainly the estimates on scrapping are very much on the low end. Also, for instance, the idle fleet is very, very low these days.
Got it. Thank you very much.
The next question is the line of David Kerstens of Jefferies. Please go ahead.
Hi, good morning, everybody. A question on the volume development. I appreciate the comment about the weakness in Intra-Asia. Maybe a quick question on like can you explain why that was so weak in the second quarter? Do you see that you're actually benefiting on other trade lanes from the trade restrictions on the Transpacific?
I think Alphaliner has said that total container imports in the U.S. haven't really changed, and that exports from China were compensated by trade lanes elsewhere. Is that an effect that you're also seeing implying that you're actually a beneficiary from the trade restrictions at the moment?
No. I mean, maybe first of all, about Intra-Asia, I think the fact that we are down in our Intra-Asia traffic is not necessarily an indication that the overall trade is down. I mean, we have just reduced our exposure to some markets where we could not make money, yeah. As such, you see lower volumes there. If you look at the other trades then, as Nicholas already mentioned, I think we on average see fairly healthy trends, yeah, with 3.5%+ or so on average. You can look at the details up in the investor report. All in all, most of the long haul seem to be okay.
Intra-Asia has been down, but that's mainly because of a decision that we took ourselves to reduce our exposure to some loss-giving business. I don't think you should read too much into that.
How large was that effect on Intra-Asia? How much was deliberately reduced?
Well, I mean, I think if you look at the numbers we showed were, I believe, about 85,000 TEUs or something like that we are down, yeah. I mean, that is pretty much 100% deliberate, yeah.
Mm-hmm.
Because we simply reduced the amount of capacity that we deployed on a number of trades where we could not make money.
Mm-hmm. What about the exceptionally strong performance on Asia, Europe and the Transatlantic as much better than what we've seen in recent years? What's driving that in your view?
I mean, you should have not overvalued this also because we still talk about single digit numbers that we have been growing. I think we've on the Atlantic, we've especially from the U.S. to Europe, we have seen a very good development. I'd say that on if you look at Asia, Europe, that's a good development, but that's also on the back of a relatively weak 2018 when we did not see-
Yeah
... very good development. I mean, the challenge with all these numbers is that I understand that everybody tries to draw a lot of conclusions on this when you look at it on a quarter-by-quarter or month-by-month basis. You have to look at this longer term. I mean, if you just look at some of the uncertainty that there is right now because of geopolitical things, I mean, you can be sure that some people will be somewhat reluctant to put their orders out now.
That does not mean that global trade will go down a lot, but that may still mean that you have one or two months where things are a little bit sluggish, and then afterwards people need to build up inventory again, and then you see a rebound.
You know, we tend to look more at 12 or 24 months trends, and those are really not certainly not falling off a cliff by any yeah stretch of imagination.
Yeah. All right. Thank you very much.
The next question is from Adrian Helm of Commerzbank. Please go ahead.
Yes. Hi, everybody. Just three questions from my side. First of all, sorry, Tibor, again, on the route mix. However, nevertheless, it really seems like that you were well able to, let's say, increase your exposure, obviously to routes that are more attractive on freight rates. I was just wondering, I mean, clearly it is easier to take away some capacity on markets you don't wanna be, but on the other hand, you need to be sure that you can fill that freed up capacity in other markets, and that worked well in Q1, Q2.
I was just wondering whether you could continue with that and how long maybe does it take you or support you going forward.
The second question is, a little bit linked to, a little bit different view on your cost items. I recognize that obviously on the personnel side of things, you still had some nice, in U.S. dollar terms, year-on-year declines. That seems to fade out a little bit. Nevertheless, that picture is continuing on other operating expenses, which is roughly in the ballpark of $80 million. That's coming down nicely again.
Also here, a little bit the question, what should we think of these positions going forward, given that you should have realized most of the UASC synergies already? The last question is, probably a little bit more general going to the peak season.
Maybe you could share your view that you have currently on how the peak season should evolve for you in terms both of volumes and rates. Thank you for that.
I mean, as far as route mix, I don't think actually we made that many changes there. I think the main change we made was reduce our exposure to some of the loss-making intra-Asia markets. Apart from that, we've not done any major redeployment of capacity. I would say that, you know, whether something goes down 3% or 5% or 6% on a six-month basis, that's not such a material difference. In terms of cost, as we said, we'll continue to work on cost. We have our program to take more costs out until 2021. That will always remain a focus. Not much more specific to be said to that.
As far as the peak season is concerned, we certainly do expect a peak season. Last year, we saw a very steep increase in rates as from the beginning of late July, beginning of August. I think that's a little bit slower this year if you look at the indices. I still expect a peak season, though, but it's always a little bit difficult to judge when it will exactly start and when it will exactly stop. If we look at our bookings that we see at this point in time, there is no reason to be extraordinarily concerned about that.
All right. Thank you.
The next question is from the line of Christian Cohrs of Warburg Research. Please go ahead.
Yes. Hello, and thanks for taking my questions. First, coming back to the first question, which was related to the potential order of 33,000 vessels. The European Sea Ports Organisation has just recently issued a paper opposing a further rise in vessel size. What is your view on that? Do you think also that such a move could be successful? Secondly, regarding potential pulling forward effects, we have seen that last year when the first round of new customs and tariffs were installed between the U.S. and China. Now more tariffs will kick in. Additionally, we also have a cost increase or a rate increase due to IMO 2020. Do you expect to see pulling forward effects also in H2 2019?
Lastly, just a housekeeping item. Your interest result in Q2 was above the Q1 level. I assume that this is due to the early debt redemption. Could you maybe quantify the impact or the special items, including your financial result Q2?
I mean, when it is around the 23,000 TEU vessels, and we've always said that going much beyond the size that we see these days, to us, makes limited sense because the incremental economic benefits of that are very limited. So, we don't see a lot of logic on going much beyond the 400 meters that we see these days.
Whether in the end, you know, what will happen in the political arena, that is not for us, I think, to comment. I would say that because of those declining economic benefits, one would not expect much bigger ships anyway. Of course, there are fewer and fewer ports that could handle ships that would be even bigger.
As far as the pull forward effects, I don't really see that, to be honest. I mean, if anything, one would expect that with the psychology around some of the geopolitical issues, there would be either a push backward effect rather than a pull forward effect. I personally don't see that. Of course, we don't have a crystal ball on that either. I think probably Nicolás can be best positioned to clarify your question on the interest.
Sure. We repaid the bond during 2022 in two installments, one in January and the other one in June. The one in January was 40% or around 40%. And there, when you look at the call premiums paid and the recognitions of transaction costs plus the value of the embedded options that bond had, were in total net-net $6 million of one-off in Q1. The same item in Q2 was $18 million.
Okay.
Simply because the derecognition of the embedded options was significantly higher. That's the difference that you see. On the other hand, when you look at the value of the embedded options of the bond that is due in 2024. We gain value of around EUR 10 million in Q1, and we gain only EUR 4 million in Q2. That's another effect that makes uneven the two quarters.
Okay, understood. Thank you.
Welcome.
The next question is from the line of Daniel Ward of J.P. Morgan. Please go ahead.
Hi. Thanks very much for the call. My first question is a follow-up on your comments on volume growth. You mentioned that you've underperformed a little bit on the Inter-Asia routes. For the second half, do you expect to grow more in line with the market, therefore? Are you still comfortable with that 3%+ market growth rate expectation? There's some variety in expectations across the market, so I'd be interested to hear your broader market thoughts on the volume side.
And then could you provide an update on your IMO 2020 discussions with your customers and how you see the industry preparedness stepping up or not as we approach the end of the year? Thank you.
Maybe first on volume. I mean, I think we have largely actually grown more or less in line with the market on most of the routes, with the exception of Inter-Asia, where we reduced our exposure because, as said, we simply could not make money there. That will not be reversed unless we can make money there going forward. I don't think you should expect a material recovery there in the upcoming quarters unless the market improves, then we may still do that.
As far as IMO is concerned, we've seen good progress and good acceptance of our bunker formula with most of our customers with whom we have agreed long-term contracts. The deals for the three-month deals and the spot rates will only be agreed in Q4.
Thank you.
The next question is from the line of Guiliano Gigli of Nordea Asset Management. Please go ahead.
Hello there. I just wanted to follow up again on the volume growth. If you could perhaps provide a better picture of the volume growth that you had per region and compare it to the general market growth in each region so I can have a better picture of where you outperform and where you underperform. Thank you.
I mean, we shared the details on a by market basis, yes?
Investor report.
In the investor report and also the graph that we showed on one of the pages gives you a good indication of where we are growing and where not. Which was page 11. I think that should give you a good flavor. I mean, if you look at the investor report, then you can see, for example, that on the Atlantic we are +7%, Pacific +1%, Far East +6%, and Inter-Asia -16%, and Latin America we are +3%.
I don't think you will see, except for Inter-Asia, as I said, where we reduced our exposure to that market, that any of the other is a huge deviation from what you see in the market.
Knowing also that there are very different numbers out there, dependent a little bit on which source you look at.
Okay. Just, again, you know, on Intra-Asia, why are you less able to make money on Intra-Asia than your competitors?
Well, I don't know how much money they are making on Inter-Asia because nobody discloses that. I'm just saying that for us, it is a market where, compared to other markets, we are not in every stretch able to make money. As such, we take an approach where we focus on those markets and those lanes where we, with our setup, can make money. If and how others do better, you have to ask them.
Okay.
The next question is from the line of Clark McPherson of Pictet. Please go ahead.
Good morning, and thanks for the call. I just have a question regarding the financing of the business. You've taken out the shorter dated euro bond. You have one euro bond outstanding, which is trading well above the call level, which can be called next year. I'm just wondering what your strategy is going to be regarding financing going forward. Just to get some idea of the cost differential between what you show on slide 24 as vessel financings and the level of where you think you could possibly refinance that bond in the capital markets.
We closely monitor that our financing position and of course we see the possibility to refinance and optimize the interest burden of the company all the time. Currently, we don't see a possibility to refinance that particular one because as you mentioned, we cannot do it until the first call window. Our functional currency is U.S. dollar, so we always prefer or benefit issuance just in dollars. We have to monitor and compare what is the interest or the coupon or the yield to maturity of a euro bond compared to a U.S. dollar bond, and what are the hedging costs.
The hedging costs have increased recently due to delta interest rates between euro and dollars, and we monitor that situation going forward to see whether we refinance or not.
We want and we commit our presence in the capital market in order to, of course, have this source of financing, which I think that's very important.
Would you have a preference for refinancing the bond in the market next year? Or would you also consider using some form of bank debt, if the interest rate differential makes sense?
I think that must be or should be evaluated at that moment. The markets are too volatile at this moment to give you a clear response to that. I believe that we have to continuously evaluate. Kind of the logic and the common sense says that we should try to avoid liabilities or non-hedged liabilities in currencies that are not dollars. In the case we issue in a different currency, we should take care of the hedging costs, and those are today important. If we issue today, that hedging cost is big, and we have to analyze that at the moment we really can go to a market and refinance at that point.
Okay, thank you very much.
The next question is from Saul Casadio of M&G. Please go ahead.
Hello. Hi. Thanks for taking my question. I just have one on your FY 2019 guidance that you have maintained and this range between EUR 1.6 billion and EUR 2 billion, including IFRS 16. If my numbers are correct, you're basically already there on an LTM basis. I have pretty much EUR 1.9 billion, as if my numbers are roughly in the ballpark.
My question is, given that you're already pretty much close to the upper end of the guidance, is it fair to expect a weaker H2 embedded in this guidance? Or just wondering if it's just a kind of a cautionary move not to raise your guidance in line with the LTM performance.
I mean, I think in general, we reiterate the guidance. We had a very strong second half year last year compared to the first half. In that context, I mean, there's not much more to be said. You know, we reiterate the guidance, and we still believe that we're gonna land somewhere in that ballpark.
If you look last year, we changed our guidance around about this time and we took it down, and I think we were positively surprised to some extent in the second half about how quickly markets can change, and that turned to our favor. Of course, that means that, you know, whenever you believe that this is still the guidance, that you should just stick to that.
Okay. Basically, if I take the lower end of that guidance, that would imply a kind of a very challenging H2. Is that something that you know is in one of the scenarios? Pretty much would be almost a 50% down if the lower end of the guidance. I'm wondering why that's still there in the guidance.
I mean, you can have difference of view there. I mean, as you could take from all the comments we have made so far, yeah, we do not expect that in the second half year things will fall off a cliff. Yeah. Having said that, we also don't see any reason right now to, you know, to change our formal guidance to the market.
Okay. Okay, thanks.
The next question is Parash Jain of HSBC. Please go ahead.
Yeah. Hello, everyone. My question is more around the preparedness of the industry as a whole with respect to securing the compliant fuel in multiple ports. If you can share some color about what are your discussions with your supplier with respect to securing the compliant fuel in certain key hubs where most of your ships will transit through. On that, if you can remind me an update on how many number of ships you intend to install scrubbers as a pilot project, and will they be ready by 1Q 2020 or not? Thank you.
I mean, first of all, around the availability of compliant fuel, you know, we bunker a lot of our fuel in the big bunker ports like Rotterdam and Singapore, and we do not expect to see an issue there with the availability of compliant fuel. Of course, as it's still six months away, there is still a certain amount of uncertainty around that, but I believe that our teams are working diligently to make sure that we will have the fuel available. As far as the scrubbers are concerned, we have a program to install scrubbers on our 10 Hamburg Express vessels. Some of them will be done before the end of this year.
I don't know the exact number, to be honest, that will be available, but I would assume that it's roughly half, yeah. If you take that as guidance. We have a couple of charter ships on which will also have scrubbers, but that's a very small number.
Yeah. Fair enough. Then just to follow up, in terms of the use of compliant fuel, is it fair to assume that when you say there'll be enough compliant fuel available, are you referring to 0.5% sulfur? Or in the first few months, industry may have to rely on 0.1% sulfur, in absence of unavailability of 0.5% sulfur?
We assume 0.5% sulfur.
Perfect. Thank you so much.
The next question is from Dan Togo Jensen of Carnegie. Please go ahead.
Yes, thank you. I was wondering whether you can provide a bit of flavor on your investment into reefer containers. First of all, how big is the investment? In which routes do you expect, so to say, to put in this capacity? Also maybe some color on the market for reefers. How have rates gone so far this year? Is this a market where you see actually returns being a bit higher than on the dry side? Thank you.
I think the investment has been, I mean, we've done an investment into 13,000 units, yeah. I think we're trying to prevent-
$114 million.
Sorry?
$114 million.
I think it was just a little bit $150 million or a little bit north of that. Yeah. As far as the routes, I mean, those are the traditional routes where we see most of the reefers. We do that to boost our position, to continue to defend and further improve our position into the trades with Latin America predominantly because that's where most of those boxes move. Of course, we invest in that market because we believe that also going forward, there will be ongoing conversion of some of the conventional ships into reefer, which means that segment will likely grow faster than the overall market.
We also believe that provided you give good service and you have the equipment available, that you can achieve margins that are above what you can achieve in some other segments.
On rates so far this year, how have they been compared to last year?
It has been fairly stable compared to last year. I mean, there have been some trades where rates have gone up. There have also been some trades where they have gone a little bit down. I wouldn't know the exact number, but I would say that if you assume that the trend in rates there is not much different from what we have seen on the dry side, that you are on the safe side.
Great. Thank you.
This is the last question for today. Please direct any further questions to the investor relations team. I would like to hand the conference call back to Rolf Habben Jansen for closing remarks.
Okay, not much, closing remarks. Thank you very much for your time. Appreciate the questions and, hope to speak to you again soon. Thank you. Bye-bye.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.